Summary of this article
States’ fiscal deficit rises to 3.3 per cent in 2024-25
Capital expenditure steady, budgeted higher for 2025-26
Demographic shifts increasingly shape state government finances
The consolidated gross fiscal deficit of states has risen to 3.3 per cent of gross domestic product in 2024-25 after staying below 3 per cent for three years, according to a new report released by the Reserve Bank of India (RBI).
In its annual publication, State Finances: A Study of Budgets of 2025-26, the central bank has assessed the financial position of state governments using actual, revised and budget estimates from recent years. The theme of this year’s report was demographic transition and its impact on state finances.
Fiscal Deficit Crosses 3 Per Cent
The report has shown that states recorded a consolidated gross fiscal deficit of 3.3 per cent of GDP in 2024-25. This has marked an increase after three consecutive years when the deficit remained below the 3 per cent level.
Higher deficit mainly reflects additional borrowing enabled through 50-year interest-free loans provided by the Centre. These loans were provided under the Special Assistance to States for Capital Investment scheme, and were over and above the normal net borrowing levels for states.
For 2025-26, states have again pencilled in their consolidated gross fiscal deficit at 3.3 per cent of GDP, pointing to a continuation of the fiscal stance of the previous years.
Capital Expenditure Is Still A Priority
Despite the increase in fiscal deficit, the thrust on capital expenditure has been maintained. According to the report, capital expenditure by states has stabilised at 2.7 per cent of GDP in 2023-24 and 2024-25.
For 2025-26, states have budgeted capital expenditure at a higher level of 3.2 per cent of GDP. RBI has emphasised that sustained capital expenditure is an important part of state budgets and has been an important focus in recent years.
State Debt Levels Remain High
The report has also highlighted high levels of debt among the state governments in the post-pandemic period. Consolidated outstanding liabilities of states were estimated at 29.2 per cent of GDP at the end of March 2026, on the basis of budget estimates.
RBI has noted that state debt levels have been high after the pandemic due to higher borrowings and measures taken to provide fiscal support over the past few years.
Demographic Transition Impacts State Finances
A major theme of the report was the effects of demographic change on state finances. The report has stated that states are at various stages of demographic transition, which has an increasingly greater impact on their fiscal position.
States with a younger population were described to have a wider window of opportunity because of a growing working-age population and better revenue mobilisation. The report also said that this phase can sustain greater economic activity and public investment, especially in human capital.
In contrast, states with ageing populations face different fiscal challenges. According to the RBI, these states are dealing with a shrinking tax base and rising committed expenditure, including higher spending on healthcare and pensions.
States that fall between these two stages were described as intermediate states. The report has stated that such states need to balance growth-related spending with early preparation for ageing-related fiscal pressures.
The RBI report provides a consolidated assessment of state finances for 2025-26 against the backdrop of actual outcomes for 2023-24 and revised or provisional estimates for 2024-25.
